CRCD - Cross Rate Convergence Divergence.
I would like to share a method of looking at the currency markets that I once found useful.
It may still be worthwhile, but I spent a great deal of time trying to formulate a working model
and never fully completed the project.
In the begining, I used this "CRCD" I called it to measure the difference between
any two currency's numerical quotation and perform analysis on the running result,
often ploting the values with a graph of some type (usually a line chart).
Pound minus D-mark, Yen (inverse) minus another currency, these were recognized spreads
on the IMM for futures orders and it wasn't unusual to place an order like:
"...Buy 5 Jun Mark/ Sell 5 Jun Swiss at ### points premium to the sell side..".
Okay, okay, I know, there's no more D-mark futures. 21st century. Let's use Euro.
The same equation with spot FX goes like this: EUR/USD minus USD/CHF = #### pips.
This is not EUR/CHF. That is something completely else. This is the quoted difference (in pips)
between the two exchange rates, ploted as if the spread itself were the instrument.
Once this data is formatted, it is plotted just like any other rate data, but often makes
sizable moves in a short time because of the inverse correlation of those particular pairs.
Use 2 other pairs like Dollar/Cad minus Dollar/Swiss. A difference in pips are calculated and when plotted,
paint a different picture that simply ploting Currency 1 divided by Currency 2.
Remember, EuroYen and PoundYen is simply multiplying DollarYen by the other crown currency.
Why not subtract one from the other and trade the spread difference ?
Also, try adding the sum of two pairs and construct a graphical representation of that movement.
What about the square of the the two ? What about using 3 pairs ?
See, I went thru all of this for a great while and came back to the original idea:
Measure the Convergence and Divergence of the price of two quoted pairs.
In the past month (even less) Euro has produced a bottom to top range of around 2300 pips.
Dollar/Swiss has seen around 1900 pips in about the same amount of time.
However, the CRCD of the two, the spread, has seen a low near 100 and a high near 4300 pips in the same time frame.
4300-100=4200, which makes sense seeing that 2300+1900 also = 4200
By contrast, the Euro/Swiss cross rate has ranged less than 1000 pips during the same time frame (11/21 to 12/18 '08).
The CRCD of a spread is a trade-worthy instrument in and of itself with 4200 pips range in only a month or so.
That's just one example.
There are characteristics akin to each of the different spreads and the "TWIX",
the point at which both pairs are quoting the same number (say both at 100)
is an especially interesting time to observe the price action.
If anyone would like to dig into a more in depth discussion of the action I'm describing here,
please sound off and comment about it. I've probably forgotten more than I remember about trading this "indicator",
but when it comes to forex, everything old is new again.
Maybe what the method needs is new ideas, so in the spirit of change, I present the CRCD.
Anybody ? (~~** crickets chirp**~~)
I would like to share a method of looking at the currency markets that I once found useful.
It may still be worthwhile, but I spent a great deal of time trying to formulate a working model
and never fully completed the project.
In the begining, I used this "CRCD" I called it to measure the difference between
any two currency's numerical quotation and perform analysis on the running result,
often ploting the values with a graph of some type (usually a line chart).
Pound minus D-mark, Yen (inverse) minus another currency, these were recognized spreads
on the IMM for futures orders and it wasn't unusual to place an order like:
"...Buy 5 Jun Mark/ Sell 5 Jun Swiss at ### points premium to the sell side..".
Okay, okay, I know, there's no more D-mark futures. 21st century. Let's use Euro.
The same equation with spot FX goes like this: EUR/USD minus USD/CHF = #### pips.
This is not EUR/CHF. That is something completely else. This is the quoted difference (in pips)
between the two exchange rates, ploted as if the spread itself were the instrument.
Once this data is formatted, it is plotted just like any other rate data, but often makes
sizable moves in a short time because of the inverse correlation of those particular pairs.
Use 2 other pairs like Dollar/Cad minus Dollar/Swiss. A difference in pips are calculated and when plotted,
paint a different picture that simply ploting Currency 1 divided by Currency 2.
Remember, EuroYen and PoundYen is simply multiplying DollarYen by the other crown currency.
Why not subtract one from the other and trade the spread difference ?
Also, try adding the sum of two pairs and construct a graphical representation of that movement.
What about the square of the the two ? What about using 3 pairs ?
See, I went thru all of this for a great while and came back to the original idea:
Measure the Convergence and Divergence of the price of two quoted pairs.
In the past month (even less) Euro has produced a bottom to top range of around 2300 pips.
Dollar/Swiss has seen around 1900 pips in about the same amount of time.
However, the CRCD of the two, the spread, has seen a low near 100 and a high near 4300 pips in the same time frame.
4300-100=4200, which makes sense seeing that 2300+1900 also = 4200
By contrast, the Euro/Swiss cross rate has ranged less than 1000 pips during the same time frame (11/21 to 12/18 '08).
The CRCD of a spread is a trade-worthy instrument in and of itself with 4200 pips range in only a month or so.
That's just one example.
There are characteristics akin to each of the different spreads and the "TWIX",
the point at which both pairs are quoting the same number (say both at 100)
is an especially interesting time to observe the price action.
If anyone would like to dig into a more in depth discussion of the action I'm describing here,
please sound off and comment about it. I've probably forgotten more than I remember about trading this "indicator",
but when it comes to forex, everything old is new again.
Maybe what the method needs is new ideas, so in the spirit of change, I present the CRCD.
Anybody ? (~~** crickets chirp**~~)